Adverse Effect Factor

When the oil/gas industry enters your land, it is recognized that there will be “adverse effects” on the landowner’s operations. The Alberta Surface Rights Act separates these “effects” into four categories:

Adverse Effects on the rest of the landowner’s lands.

Nuisance

Inconvenience

Noise

It is generally recognized that #1 is “tangible” or “measurable” while #2-4 are more “intangible” or difficult to prove or measure. This is not totally accurate, since “adverse effects” on the rest of the landowner’s lands can also be shown to be both tangible and intangible.

The oil/gas industry has taken great pains to describe the effects of their operations as minimal, and as a net benefit to the landowner. They are all great stewards and always follow the law. Safety standards are always met and accidents rarely happen. The following is a frank description of the possible “adverse effects” that landowners in the province of Alberta can reasonably expect to occur as a result of the oil/gas industry’s operations on their land.

Nuisance and Inconvenience

GENERAL FACTORS

The fact that the government of Alberta has given the oil/gas industry preferential access to land in the province, leads to an adversarial relationship between industry and landowners. If the operator can safely engage in their suggested activity, the ERCB and SRB will give them permission to do so. This adversarial relationship therefore leads to the following factors of nuisance and inconvenience.

Unwelcome and Unwilling Relationship
The operator is allowed to engage in activities which can affect your use of your own land. Their priorities will not be the same as yours.

50 year lease
Most leases in the province are for 40-50 years. Most landowners will be dead before the lease that they signed will be removed from their land. This means that not only will the lease affect your plans in the present, it will also affect the future plans of yourself and your successors.

Ownership Changes
There will likely be a number of ownership changes of the lease, as oil/gas companies merge or make acquisitions/divestitures. You may not always be informed of these changes in a timely manner. The local operator may change and “verbal” arrangements with prior operators may be disregarded. Unless all agreements are in writing, they will not have any standing with new operators.
You will also be responsible to inform the company of any changes in land title ownership. If you sell the land or if title changes as a result of your death, divorce or estate arrangements, you are required to give notice to the company. This usually involves procuring the services of a lawyer at your own expense.

Caveat on land title
The oil/gas company will put a caveat on your land to protect their rights. They will not necessarily remove it when they abandon the site. You may again have to engage the services of a lawyer to get it removed when the time comes.

Rent Review Notices
The oil/gas company is supposed to send you a rent review notice at the 4th year anniversary of the service lease. You are then entitled to renegotiate a new rental rate. Not all companies do this even though it is required by law. The Surface Rights Board expects you to be proactive in this regard and has time restrictions for applying to them for a rent increase. This requires time and awareness on your part.

Ignoring Rent Review Requests
Many companies will ignore your request for a rent increase. Over time, your rents should increase and some companies will ignore requests for increases, hoping that your will simply tire of the process and go away.

Have you been paid?
If you have a number of leases on your land, it can be quite a chore to make sure that all leases have been paid for. Compensation for energy activities on your land can have tax implications and you will likely need to engage the services of an accountant.

Dealing with land agents
All negotiations between landowners and the industry usually involve a land agent. The land agent is paid by industry and does not act in your interest even though it will likely be implied that he/she is looking after your interests. Even though the land agent is subject to ethical rules, in practice the land agent Registrar is very tolerant of “breaches of ethical conduct” and generally ignores most instances of poor behavior.Some land agents are very aggressive, they may only offer low levels of compensation to ensure their continued employment. They may make verbal agreements knowing full well that the company will have no intention of keeping them. They are there to “do the deal” and some will do whatever it takes.

On the other hand, it will be very difficult to find someone to represent yourself. There are very few landowner representatives in the province. If you do manage to find one, they will generally be threatened/intimidated by the oil/gas company who does not like dealing with informed and knowledgeable landowners. Even though the Surface Rights Act states that the oil/gas company must pay for your representation (i.e. lawyer, land agent or accountant), it can often be difficult to get the operator to pay for these services.

Becoming informed
Unless a land owner is informed about relevant regulations and compensation schedules in the local area, he/she is at a distinct disadvantage. To fully protect your rights you will need to become familiar with the Surface Rights Act, various ERCB directives, what other operators are paying in the area, the so-called “pattern of dealings” and other legislation from Alberta Environment. This can be a daunting task, and is one reason why the relationship between industry and landowners is often unwilling and adversarial.The leases and right-of-way agreements used by industry have been developed to protect their interests, not yours. Knowledgeable landowners often attach “addendums” with additional conditions which further protect their own interests. Obtaining good “addendums” can require significant time and effort on the part of the landowners.

Documentation

a) Loss of Use and Adverse Effect

Over the term of the surface lease, you are allowed to ask for increased compensation. However, you will need to be able to prove your Loss of Use (revenues per acre) and be expected to describe the adverse effects on your land. This requires rotation records, yield data, price information, pictures, input prices and many calculations. If you go to the Surface Rights Board, they want evidence, not your opinion.b) Legal Forms

If you go to the SRB or ERCB, they will require you to fill out applications for every lease. You are required to obtain the forms and fill them out. If you have a number of leases on your land, this can be quite onerous.

ADR process
If disagreement results between yourself and the operator, the ERCB and the SRB now have “appropriate dispute resolution” or “mediation” processes available. Industry expects you to interrupt your schedule to attend these meetings, and it would be advisable to have some type of representation along.

Damage Claims
Accidents happen! If spills occur on lease sites, the operator is not required to inform you. If spills occur off-site they are. Pipelines can break and land can become contaminated. If you cannot resolve these issues with the operator, you will need to make application to the Surface Rights Board. Be aware that the two-year Statute of Limitations applies. You should also be aware that it can be very difficult to prove damage causes and the quantum of the loss. Obviously, the operator will try to minimize the costs that they will have to pay. It is possible that if you fail to prove loss, your legal bills could be higher than the award.For this reason, most landowners reconcile themselves to the fact that minor damage claims may not be worth prosecuting and simply a cost of having industry on your land.

Deep Pockets
Just because its in writing does not mean that you will win. Many operators break clauses in the lease simply because most landowners do not have the time, money or stress tolerance level to pursue the matter. Who wants to sue a multi-billion dollar oil/gas company? Many operators have lawyers on retainer. They often make decisions based on cost, not what the lease says. This is a fact of life, you will have to deal with it.

Ambiguity of the law
Many aspects of the legal arena regarding the oil/gas industry are not clear. The operator may only want to pay net Loss of Use instead of gross. Legal requirements or ethical expectations are open for interpretation. Don’t assume that because the “lease” says it, that’s the way it is. The lease may not be legal and the law or government regulations can change.

Operator Employees
While the oil/gas company may be responsible for their employee’s actions, they cannot always control them. Be aware that the industry suffers from employees with drug or alcohol problems. Safety standards are not always followed, speeding or unsafe driving occurs, and respects for property is not the same as it used to be.

Reclamation Factors
Surface leases prior to the early 1980’s are required to be restored to 70% of original productivity. Surface leases after that time period need to be restored to 80% of original productivity. Since agriculture operates on low profit margins, you should be aware that you may never make a profit on the acreage within the lease site again, even after the site has been reclaimed and restored to you.

Possibility of Orphan Well
Oil/gas companies go bankrupt. Not only will you have to go after the government for backrentals owing, you may be faced with cleanup and restoration costs. The Orphan Well Association has funds of around $8 million and liabilities which have been estimated at $8 billion. Recent Surface Rights Board decisions imply that you may have to face the majority of this burden yourself.

Environmental Liabilities
Oil/gas exploration uses toxic or hazardous materials. Such chemicals are often stored on site. Spills and leaks can result in contamination of the lease or right-of-way and surrounding areas. The operator is not required to inform you about spills on the lease site. You will not be compensated for spills on the surface lease and will face difficulty in obtaining redress for spill damage off the lease area. Coalbed methane development and other types of well exploitation use “fraccing” techniques which can contaminate underground aquifers, surface water bodies or ruin nearby water wells. The ERCB allows this activity and compensation for damage from these activities can be difficult to obtain.
Many landowners have Environmental Farm Plans which assume that the landowner is a responsible steward of his/her land. Regulations which prevent the landowner from knowing what is occurring on his/her own land do not enhance this stewardship.Some financial companies have refused to finance land with multiple surface lease sites or extensive oil/gas development. They refuse to expose themselves to potential liabilities. The landowner has no choice in the matter.

SPECIFIC FACTORS AFFECTING THE REST OF YOUR LAND

Dust
Access Roads lead to dust. The dust may affect nearby crops, but has a greater effect on crops used to feed livestock, livestock themselves and nearby residences.

Non-approved access roads
Operators often take shortcuts through the landowner’s fields. While this may be more efficient for them, it can cause ruts, crop damage and weed issues; let alone being an instance of trespass.

Access Roads
Interior sites are accessed by roads within the field. These roads can be a major source of nuisance by causing:

a) interference with natural drainage
b) having to move irrigation equipment because of the access road,

c) irrigation pivots becoming stuck because of water back-up due to access road,

d) interference of access road with diagonal disking or cultivation,

e) severance of the field into smaller parcels which are more difficult to work

f) weed proliferation

g) overlapping of seed, fertilizer and chemical because equipment width does not match location of access road.

h) causing narrow necks of land around the lease site which are difficult to work

i) increasing access of the public to the property

j) lead to increased trespass by hunters

k) lead to increased theft problems

l) increased chance of livestock getting loose or being injured. The extra monitoring and liability issues from escaped livestock is a significant nuisance and inconvenience.

NOXIOUS/RESISTANT WEEDS
Noxious and chemically resistant weeds are becoming a significant problem on oil/gas leases. The weed seeds are carried on drilling rigs, water trucks and service personnel vehicles. Many new lease addendums require all vehicles and equipment to be washed before entering the lease site. The presence of weeds is an embarrassment and eyesore, and they can be spread by combine and truck to other quarters.This leads to costly herbicide cocktails being necessary. These weeds make straight-combining difficult and the weed seeds lead to higher dockage and can cause heating and spoilage in stored grain.

PLANT DISEASES
Diseases are also carried on drilling and service rigs, water trucks and service personnel vehicles. Equipment coming from the Edmonton/Leduc area can carry clubroot, which is a severe disease in canola. Once present, you cannot get rid of it. It can reduce yields by 50%. Fusarium is another disease which is easily spread and can reduce yields drastically.
Since oilfield equipment can be a major source of disease spread, adverse effect compensation should be increased to offset the risk.

FIRE
Surface leases accessed by ungravelled access roads through the crop are subject to the possibility of fire due to operator traffic.

INSURANCE AND LIABILITY
Insurance companies have recently increased premiums and reduced coverage for oil and gas companies because they recognize that this is a huge area of potential liability.
Since 9/11 the oil and gas industry is still reeling from coverage restrictions, record-level deductibles and a massive spike in prices.” Crucial coverages, such as “control of well,” which insures against fires and explosions, and terrorism coverage have dried up. Rates for property and liability have skyrocketed. Rates for an average lease in 2000 were $5000 per year. Since 9/11, they are now at the $10,000 level.Insurance companies deal with future liabilities. Landowner deal with current problems. Landowners provide uncompensated surveillance and monitoring services. They report spills, breakdowns and vandalism.

Garbage
Garbage blowing off the lease is unsightly. It can plug seeding equipment causing blocked seed runs until the problem is rectified. Care must also be taken to unsure this material does not enter the combine or is eaten by livestock. Broken glass is a serious problem on potato ground since the potato can absorb the glass and be carried into the food chain. Survey stakes and wire flags can cause significant damage to harvesting equipment.

Service rigs
These rigs often trespass off the lease and ruin crops. This results in a volunteer weed problem the next year. While this practice is extremely annoying, it is not worth going to the SRB or court, over.

Wind & Water erosion
Surface leases disturb the surface of the soil. Water and wind erosion can cause deep gullies or drifted soil which can affect surrounding areas.

Extra difficulty of night operations
With today’s modern equipment and harvest pressures, farmers often work at night. This increases the risk of hitting oil/gas structures which can damage farming equipment and lead to costly cleanup activities. The use of hired help, who are not familiar with the locations of such structures only aggravates the problem.

Regulatory set-backs
The ERCB enforces set-back distances which protect the integrity of the oil/gas development. These set-backs are for both landowner and operator safety. Generally, the landowner is prevented from developing any permanent structure within 100 m of the oil/gas structure. The presence of high levels of H2S gas or battery sites can lead to higher set-back distances. The landowner is not compensated for this area. The operator may only pay for the 3 acre lease, while the landowner may actually be prevented from building on 7.75 acres or more.The set-backs do not disappear when reclamation is complete. The landowner will never be able to develop within 5-15 m of the capped wellhead, because if the cap fails re-entry will be required to seal the bore again.

Risk associated with H2S gas
H2S is a deadly gas associated with sour gas wells (oil and gas). The industry loses employees each year to this gas and places warning signs on those facilities where the gas is present. These wells can be within 100 m of residences and there is a risk associated with this close association. There is expert evidence which suggests strong correlation between some chronic health problems and H2S gas. So far the ERCB has ignored this evidence. The SRB has compensated an extra $200 in adverse effects for the presence of H2S gas. Some landowners may feel their lives are worth more than this.

Loss of quiet enjoyment
An important right associated with land ownership is the right to quietly enjoy your property without outside interference. This right is obviously interfered with when the oil/gas industry knocks on your door. Past governments in Alberta have decided that energy development must proceed in the public interest, but landowners are to be “made whole”. This factor is difficult to quantify.

Loss of alternative use
As previously mentioned, a lease can last 50 years or more. Future subdivision plans, yard expansion or plans for a 2nd residence can be adversely affected.

Noise and smell
Some facilities like compressors, batteries, pumpjacks or screwpumps with squeaky bearings can cause significant noise. Likewise, some facilities can smell bad. If these sites are near a residence the effects can be very irritating.

Home ¼ status
The SRB awards higher compensation for adverse effect for leases on the home ¼. Noise, smell, dust etc. have a greater disturbance level. The problem, is that a lease can still be ½ mile away from a residence and still be on the home ¼. On the other hand, a lease can be within a 100 m across the road and not be on the home ¼. Some companies do address this issue in a reasonable manner, however, none of them compensate neighbors who may suffer to a greater degree than the actual landowner.

Traffic
Gas wells generally have less traffic than oil wells and are compensated less. Another problem is that operators often do not mark their vehicles and it is difficult to tell if visitors are legitimate or not. Bio-security measures of food safety combined with a lack of awareness of who is on oil/gas leases can lead to aggravating situations.

TANGIBLE ADVERSE EFFECTS ON THE REST OF YOUR LAND

Tangible effects are more easily identified and measured. There are a number of businesses in the province that generally provide expert evidence and testimony on the behalf of the energy industry at ERCB and SRB hearings. Although landowners also have access to such information, there are fewer providers of these services to the landowner. Fortunately, the landowner has the best vantage point from which to provide this type of information and the expert evidence is usually discounted compared to the landowner’s evidence. Some of these factors are:

Location of the site
Interior sites generally have greater adverse effects than exterior sites. If the surface lease is not flush with land boundaries, narrow necks of land which are difficult to maneuver around result. The effect of access roads has already been described. If the lease is located near residences or livestock, additional problems can result.

Maneuvering around the site
The width of farming equipment can greatly affect the difficulty of maneuvering around wellheads. The use of GPS and autosteer equipment can also be adversely affected. Multiple passes around the site can lead to soil compaction. If the land is used for grazing, these problems are alleviated, but livestock safety issues will be increased.

Extra time required, and resulting stress
Multiple passes around the wellhead obviously result in extra time being expended. Large equipment trains do not turn on a dime and long swings into the surrounding land may be required. Care must be taken to avoid hitting the oil/gas facilities. Sometimes backing up equipment or lifting equipment wings will be required if the approach has been to close.

Cost of overlaps, wasted inputs
The overlapping of seeding, spraying and fertilizing equipment lead to wasted inputs. These costs are relatively easy to calculate and have risen steadily over the last few years. Although the SRB does not adjust surface rentals according to inflation, this factor has inflation already built in.

The effects of overlaps
Overlaps can also cause uneven maturity, lodging, chemical burn, chemical residual, stunted crops and higher levels of dockage. While these effects are harder to quantify, some models simply assume a percentage loss of crop value.

Cumulative effects
If one lease causes problems, two cause more. Landowners with 10-60 leases can face a significant time requirement in dealing with multiple oil/gas companies, different land agents, rent review notices, changes in ownership, etc.

Multiple wellheads
Two wellheads on a lease generally more than doubles weed problems, equipment turning and service rig visits. Once you get past three wellheads, it can be argued that the increase is not exactly cumulative. However, each wellhead increases the chance of a service rig damaging crop on and off the lease. Since you are only compensated once for Loss of Use, each service rig visit jeopardizes the crop that you are farming on and around the lease. Each wellhead should therefore award additional compensation to compensate for the risk.

Wear and tear on equipment
Turning causes most wear and tear on agricultural equipment. Farming around wellhead requires multiple turns at sharp angles which unduly stresses equipment. Although time of turning can be calculated and multiplied by hourly equipment costs, this calculation does not capture the higher stresses on equipment turning around the lease sites.

Input Prices
Although the Board does not take annual inflation into account when awarding claims, the additional maneuvering and the overlapping which occurs at the well site requires additional fuel, labor, chemical and fertilizer; all of which rise in cost with inflation and have increased on average by 75% since the lease rental rates were implemented. The additional maneuvering also obviously results in more wear and tear on equipment. Capital costs for tractors, harvesting machinery, and tillage equipment have also increased around 25% since these wells were last adjusted. As reported in the October 13, 2005 Western Producer, “farming around the infrastructure of the oil and gas industry is costly and when the landman responsible for negotiating terms of access works for an oil and gas company that holds undeniable access rights, farmers are in a squeeze. That embrace will only get tighter.”

The following table shows the rates of increase of various inputs since 1990.
Alberta Annual Average Farm